China's Stock Market: Out of the Valley in 2004?

Abstract:     
This paper reviews developments in China's stock market in 2003 and assesses the outlook for 2004. There were no major policy shifts in stock market policy in 2003 and the market spent the year without much direction. The priority of the new government appears to be retail bank reform, and rightly so. Stock market policy is dedicated to the quiet implementation of corporate governance reforms at listed firms, growth of institutional investment, a gradual opening up to QFII investors, and efforts to improve the issuance framework. However, despite these reforms regular scandals in 2003 continued to undermine investor confidence and listed companies' results did not provide much cause for optimism. A shift to 'value' investing took place in the second half of 2003 as fund managers targeted large-cap, generally profitable. A two-track stock market, of highly-priced 'blue-chips' and also - ran small companies, began to emerge. By the middle of 2004, a blue-chip bubble could have developed.

Given weak proprietary trading and underwriting revenues, most securities companies, already insolvent, became more dependent on brokerage fees. Massive consolidation in the sector is only a matter of time. In contrast, investment funds are enjoying rapid growth. Redemption pressures will, however, be strong during 2004 as new, more sophisticated products attract money and insurance funds become able to invest in equities directly. In February 2004, a State Council white paper laid out the government's intention to continue developing the stock market and repeated its commitment to resolve the non-tradable share issue. Given a healthy macro-economic environment, strong demand from institutions, including some QFII money, and continuing - if slow - improvements at listed firms, 2004 will likely see the market 'out of the valley'. However, given the sensitivity and practical difficulties of this issue, doubts remain over whether progress to liquidate state shareholdings can be made in 2004.

Number of Pages in PDF File: 12

Keywords: China, stock market, regulation, state shares, investment funds

JEL Classification: G10, G24, G38, N25

working papers series